Dashboard Spotlight: US Student Debt

In recent times, there has been a lot of debate about the real value of college degrees. This seemingly-academic discussion assumes deeper significance given that college students have been – for a long time now – racking up tremendous volumes of educational debt. Sizable percentages of new graduates are beginning their professional careers deeply mired in debt that takes them a long time to pay off, if they ever succeed in doing so.

In the current context, given the precipitous state of the U.S. economy and the disquieting fact that about 37 million Americans are bogged down by student loan debt, an increasing number of people are beginning to seriously question whether the costs of college education have begun to dwarf the benefits.

We have attempted in this post to shed some light on this rather polarising topic by analyzing a few data sets that deal with different aspects of this phenomenon. We start out by plotting a graph of the total volume of U.S. student debt over the past ten years.

A dramatic year-on-year rise is discernible here, much more than the inflation levels, with the current debt level nudging a trillion dollars. It is also worth noting that the total volume of debt went up four-fold during this ten-year period.

One of the reasons put forward for this is that colleges need to invest a lot in keeping their infrastructure and know-how up-to-date with latest developments in technology and industry, and invest in the upkeep of facilities for accommodation and recreation, which are generally recouped by imposing higher attendance costs on the students.

The second reason given is that the colleges have become highly inefficient when it comes to resources. For example, according to the Wikipedia article on University of California, there is 1 administrative staff for every 2.6 students and 1 academic staff for every 17.7 students. Another perspective suggests that the presence of multiple third-parties (private operators, federal government) in the funding process causes borrowers (mostly 19-year olds, fresh out of high school) to be less sensitive to the costs, which leads them to remain on an upward path.

We next examine the trend of college costs and see if there is any correlation to be made with the volume of student loan debt. The data being plotted pertains to the average tuition cost for a year of attendance. The data is limited to 4-year non-profit private and public colleges. All figures are adjusted to 2012 dollars.

In this case too a continuous upward trend is seen. One opinion on this phenomenon is that presidents and administrative heads in colleges receive unduly high levels of compensation and benefits, which are recouped from the costs borne by students.

Next, to get a sense of the extent to which student loan debts contribute to the overall debt scenario, we plot a chart of the total outstanding amount for the different types of debt over the past ten years.

We have excluded mortgage debts from this chart, since they would clearly make up the largest chunk of all the different debt types. Surprisingly, student loans make up the next-highest segment, even outstripping credit card debt. And you can see its height grow in each of the quarter’s stacked bar.

Loan delinquency rates are a stark indicator of the burden faced by borrowers whose financial circumstances make it impossible for them to honor their re-payment commitments. The graph below plots the percentage of seriously delinquent loans (i.e., those past due for 90 days or over) over the past ten years, segmented by loan type.

As the graph shows, the highest percentage of seriously overdue loans comes from student loan borrowers. This is a disturbing trend, since delinquencies invariably tend to play havoc with the borrower’s credit history, which in turn can negatively impact employment prospects, effectively trapping the borrower in a vicious cycle and making it very hard for them to get back on their feet.

To push the analysis a little deeper, we next examine the total student loan debt burden based on the age group of the borrowers. Information is included for the last eight years.

It can be inferred that those in their twenties and thirties are bearing the brunt of outstanding student debt. The dramatic rise of college costs in the past couple of decades, a pace easily outstripping that of inflation, can be pointed out as a major contributor to this state of affairs.

We next plot the average student loan debt burden held by people belonging to different age groups for the years 2005 and 2012 to see if any changes have taken place.

The above graphs show that the age-wise breakdown of debt is almost similar for both the years, with the average debt burden being highest for those in their thirties. This may be due to the effect of interest rates, coupled with the fact that a certain amount of time is required before students with debt are able to find steady jobs and get back on their financial feet.

The big difference is in the actual numbers themselves. The members of each age group in 2012 held an average debt burden over 1.42 times larger than they did in 2005 – a dramatic increase by any measure, and one that is symptomatic of a worrying trend.

Correlating aspects of the the student loan phenomenon with common economic indicators might shed more light on the real impact of this issue, and also serve to provide some context to the numbers involved. Accordingly, we analyze the trend of average annual college costs for 4-year public colleges alongside the Consumer Price Index, a metric used to calculate inflation.

It can be noticed that – based on the latest data available – college costs are on track to outpace the inflation indicator. An important point to note is that costs for private colleges tend to be higher than those for public ones, so these numbers are likely to be understating the problem. Given the current economic situation, this is yet another hurdle to be faced by young college aspirants who lack the financial resources to fund the costs involved.

Proceeding along the same lines, we next attempt to compare the CPI with the total student loan debt to see if we can find any insights.

Both items are somewhat correlated. It must be noted outstanding student loans usually take individuals several years to pay off, and given the impact of interest rates and a sluggish economy, it cannot be doubted that these loans place a severe stress on the holders both financially and psychologically.

Unemployment percentage is another common indicator of weakness in an economy. We next try to see if trying to correlate the percentage of heavily delinquent student loans (i.e. those with payments overdue by 90 or more days) with the unemployment rate shows brings up anything interesting.

Between early 2008 and late 2009, a period that corresponds with the duration of the most recent U.S. recession, we can see that unemployment spiked dramatically. However, by early 2010 it had begun to moderate, and has been on a downward trajectory now for a few quarters. As for the delinquency percentage, it too has been growing in recent years, but a sudden uptick is noticed towards late 2011, and the upward trend is continuing up to the present.

Finally, we examine three rather sombre indicators in one chart – Unemployment percentage, Duration of Unemployment, and Student loan delinquency.

It is evident that the average duration of unemployment is heading higher in recent times. A disturbing fact is that the greater the period of unemployment, the harder it usually becomes to land another job. While not all student loan defaulters might lack employment, it is reasonable to assume that a greater percentage of the highly delinquent ones are likely to fall into this category.

2 thoughts on “Dashboard Spotlight: US Student Debt”

One of the things I never understood was aren’t many of these loans paid off while the student is still in the program? For example, when you’re studying to become a health professional then you have a residency period where you are making an income, albeit it’s low but it’s something. And for other professions, there are jobs that pay that students can do while in their program. I’m currently preparing for my CPA, I have friends who are paying their expenses with freelance jobs, site they use is studentfreelance.com, and I have another set of friends in MBA programs where they have various consulting gigs, actually they’re making the best money. So correct me if I’m wrong, but you can walk out of any program with little to no debt if you put enough work into it.

Yes, one may find “employment” while matriculating. Yes, one may even begin a *very* profitable concern while in formal education.

But . . .

Before you assume that your education costs will be offset from “employment,” get a handle on your total cost of living. The “income” you can generate while a student has many places to go – i.e., your living, taxation, activities required by your matriculation, supplies, and the costs generated by the “employment,” such as business costs, raw material costs, staffing costs, etc., etc.

Add to this financial load the fact that your “employment” as a student has little significance if it is focused on what you are learning – a junior craftsperson makes a fraction of the journeyman, and has a deep struggle to find steady, profit-generating clientele.

So, rather than make assumptions for your “employment,” do the hard work of fact-based research B4 you get into a fantasyland of very *REAL* unrealized “employment” income that has become a *VERY* real additional Debt.